The report that a few strong public sector banks are openly engaged in a smear campaign against the loss-making Indian Bank has brought to the fore the failure of the Reserve Bank of India's (RBI) supervisory function.
The very fact that the Madras-based bank was allowed to reach this stage is also a pointer to the failure of RBI's inspection arm.
If insiders are to be believed, the banks are inspected on a regular basis and the reports are diligently prepared but seldom read. The RBI inspection teams visit the headquarters, a few controlling offices and a cross-section of branches of a bank to compile the report. But when it is summarised for the perusal of the RBI brass, the entire exercise turns into a few generalisations like "pre-sanction appraisal unsatisfactory; credit supervision and credit monitoring is poor; control over branches leaves scope for improvement...."
If the reports are not read, how does the RBI act on the findings? Well, the senior executives conduct discussions on the findings with the concerned bank chairman, often without taking a glance at the paper prepared by staff. The details of wrong-doings often go unnoticed -- whether they be irregular credit decisions or window-dressing of the profit or provisions doubling as write-off or gross underestimation of NPAs. The inspection report and the accompanying confidential document which offer a wealth of information are usually kept under wraps (if not leaked to the press).
Bankers also feel that had the RBI directives been plain, there would have been better compliance. More often than not, the directives are vague and one stumbles on a number of irritants like non-recovery in any two quarters in a year makes an account NPA, non-recovery in one account makes all accounts NPA, a bad debt with one member bank becomes a bad debt to all consortium members, government-guaranteed accounts are not to be classified as NPA even though the advances are bad... the list is endless.
RBI is bringing out a compendium of circulars issued by its department of banking operations and development. The compendium will be a 3,000-page volume with all directives rewritten in indirect speeches like " banks were advised ... banks are further advised . . . etc." One hopes the RBI circulars --- seldom known for clarity -- - will be made comprehensible in the compendium.